Cartoons – Page 2 – We Know Zero

There’s a hole in our bucket

02. December 2023 · Write a comment · Categories: Cartoons, Pensions, Regulation

In my previous post, I talked about out how dependent the bottom half of the income scale was on the state pension of £10,600 pa, and how an increase of at least 40% to the state pension was needed to reset the balance between a guaranteed income and that based on the markets to European levels.

However there was another aspect of the state pension which I did not mention last time and which also needs to be addressed.

Who gets it?

Source: ONS – Almost all pensioners (97%) received income from State Pension, with an average amount of £195 per week. Some peaks in the distribution may be explained by the basic State Pension rate, which was £137.50 per week in FYE 2022, as well as the new State Pension full rate, which was £179.60.

As the graph above shows, by no means does everyone get the full state pension (although legacy state benefits mean that some get considerably more).

As the Undefined Benefit: Fixing the UK Pensions System report mentioned in my previous post explains:

To qualify for this full state pension, an individual needs to have made 35 years of National Insurance contributions or have equivalent credits. To qualify for any fraction of the state pension, an individual must have made at least ten years of contributions or have equivalent credits. Thus, even the UK’s first pillar, the state pension, is to a degree contribution based. This stands in contrast with countries such as Canada, Mexico, the Netherlands and New Zealand, which have adopted a residence-based, non-contributory basic pension. Residency-based pensions increase coverage and seem to be effective in reducing poverty rates in old age.

How much?

Returning to the PLSA’s retirement living standards again, we have the following:

Source: PLSA – these are single retirement living standards outside London

You will note that the retirement living standards assume:

income tax is payable;
people are mortgage and rent free; and
it also does not cover care costs.

The minimum level would then require a 21% uplift to the basic state pension, assuming no meaningful private or occupational pension assets (which we saw last time was a reasonable assumption for most of the bottom half of the income scale).

According to the Government’s figures, in 2020-21, 5% of all older households (ie where the household “reference” person was 65 or older) were mortgagors, 6% were private renters and 15% were social renters (down from 19% in 2010-2011). The remaining 75% of older households were outright owners (up from 71%). So we are going to need more for our minimum level to meet the needs of the 25% who are still paying rent or mortgages. The average household income spent on rent amongst older renters is 38% for private renters and 27% for social renters.

Assuming this household income is the basic state pension and the average housing costs of the group we are concerned about (ie totally or almost totally dependent upon the state pension) are in line with social housing rent, we would need an additional 37% uplift to the state pension (to mean that taking 27% of it would get you back to where you started) to 66% of state pension, ie a total of £17,600 pa before the latest state pension increase. If you are aiming for the moderate retirement living standard you would need over twice as big an overall state pension at £35,600 pa.

Means-tested benefits

At this point, if you are shouting at your phone or computer “but you are ignoring means-tested benefits!” you would be correct. Age UK give a handy guide to means tested benefits, but in a nutshell we have:

Cold Weather Payment – £25 a week for each 7-day period of cold weather. This only applies between 1 November and 31 March each year.
Council Tax Support – there is no set amount of Council Tax Support. What you get depends on your circumstances and where you live. Each local council is responsible for operating its own Council Tax Support scheme so the amounts of support given across the country may vary.
Housing Benefit – Housing Benefit is money to help you cover your rent if you’re living on a low income.
Income Support – this is going to be fully replaced by universal credit by the end of 2024. Universal Credit has come in for a lot of criticism – this is the Trussell Trust’s take on it.
Pension Credit – the bit of this that we are interested in is the Guarantee Credit, which tops up your weekly income to a guaranteed minimum level. In 2023-24, this level is: £201.05 if you’re single and £306.85 if you’re a couple (note that these are still below the levels of the basic state pension).
Universal Credit – for a single person over 25 this is currently £368.74 per month but there are many circumstances which can lead to deductions to this amount and the Trussell Trust (see above) has this to say about it:

These are at the lowest levels in 30 years and aren’t protecting people from destitution, meaning they are unable to afford the essentials we all need to eat, stay warm and dry and keep clean.

The trouble with means-tested benefits are:

Not everyone claims them. An FT article from April 2022 claimed that there were £15 billion of unclaimed means-tested benefits – for a variety of reasons, but with lack of internet access (18% of older households) being a major one. This compares with £5 billion currently spent on Pension Credit and £6 billion spent on Housing Benefit for over 65s, so you can see the size of the problem here;
They create, in some cases, high effective marginal tax rates for people who want to earn a little extra income, by removing benefit as income increases;
If a benefit is not universal, there is a danger that the recipients will become so marginalised that their voice is no longer strong enough to defend it, and people might not feel like full citizens of the society they live in. Applying for benefits requires admitting poverty which can be humiliating;
Means-tested benefits are often poorly targeted. The Report of the UN’s Special Rapporteur from 2019 on extreme poverty and human rights, whose recent comments gave me the title for this post, included the following amongst its 11 recommendations: Initiate an independent review of the efficacy of changes to welfare conditionality and sanctions introduced since 2012 by the Department of Work and Pensions;
There are good reasons for people not to want to claim means tested benefits, as the UN report says: The basic message, delivered in the language of managerial efficiency and automation, is that almost any alternative will be more tolerable than seeking to obtain government benefits.
Means-tested benefits cost a lot to administer. The latest National Audit Office guide to the Department of Work and Pensions (DWP) for instance (from 2015-16) indicates the following split:

Of a total budget of £176.6 billion, departmental expenditure in addition to benefit expenditure was £6.3 billion. Attempts to reduce this figure since 2016 appear to have resulted in big increases to under and over payments. Simon Duffy of Citizen Network, who has looked at this extensively and attempted to compare the net benefit to recipients to the total administrative costs including those of the tax system, estimates that, to make people £1 better off, the DWP spends £0.22.

It therefore seems to me that, in order to provide a guaranteed minimum level of living standards in retirement, not dependent upon pensioners being invested in the right way, or filling in the right forms or their employment history, and not vulnerable to the punitive sanctions currently applied to conditional benefits like Universal Credit, we are going to need a state pension somewhere north of 66% above its current level. So how do we pay for it?

How do we pay for it?

My very rough estimate of the amount required to top up everyone below the full state pension in the graph at the top of this post is around an additional 23%.

The current state pension cost around £110 billion pa in 2022-23 or 4.4% of GDP. Allowing for the Pension Credit, Housing Credit and Winter Fuel Allowance at half their current levels following the increase to state pension proposed (a very conservative estimate I believe, which also does not include the smaller increase that those on legacy benefits will need) brings it up to 4.75% of GDP. So what I am proposing would cost up to an additional £73 billion pa in state pension or an additional 2.9% of GDP, or a total of 7.65% of GDP plus the 23% uplift required to top everyone up to the full state pension bringing it to 9.4%, which would put us above the current OECD average of 8% of GDP, although still less than is currently paid by Italy, Greece, France, Austria, Portugal, Finland, Spain, Poland, Belgium, Slovenia and Germany. It is therefore something that we can afford to do in the world’s 5th largest economy if we make this a priority.

These additional payments of around £125 billion would result in immediate increased income tax payments (assuming all at the 20% rate) of £25 billion plus the ONS estimate between 18% and 28% of the poorest 40% of households’ income is spent on indirect taxation, averaging 23% or £29 billion. However, as Richard Murphy has pointed out, there is currently a risk that millions of pensioners will have to complete tax returns (in many cases for the first time) next year due to the triple lock bringing pension levels above the frozen personal allowance. HMRC will therefore need to be reformed so as to be able to collect tax on pensions via PAYE and allow pensioners to receive net pensions in future.

My view is that raising the guaranteed state pension to a level which will be sufficient post tax is preferable to just lifting the personal allowance above the new state pension level. Why? Because:

Everyone would get the new personal allowance, reducing taxation of the wealthiest as well as the poorest, with no particular benefit to the poorest; and
One of my problems with means tested benefits is that they marginalise people so that they do not feel like full members of society. The same applies to not paying tax. If you pay tax, you are more likely to want a say in how that society is organised.

Some options for funding more than the remaining balance of £71 billion, picked out from Richard Murphy’s very conservative estimates here, are as follows:

Ending higher rates of tax relief on pension contributions. This would raise £14.5 billion in tax a year;
Abolishing the VAT exemption for financial services within the UK might raise £8.7 billion of additional tax revenue pa;
Reforming national insurance charges on higher levels of earned income in the UK might raise an additional £12.5 billion of tax revenue pa;
Aligning capital gains tax and income tax rates in the UK might raise more than £12 billion in additional tax a year;
Reforming the administration of corporation tax in the UK might raise at least £6 billion of tax a year;
Abolishing the inheritance tax exemption on some funds retained in pension arrangements at the time of a person’s death might raise £1.3 billion a year;
Reforming inheritance tax business property relief might raise £3.2 billion of tax a year;
Reforming inheritance tax agricultural property relief might raise £1.0 billion of tax a year;
Reforming Companies House might raise £6 billion of tax a year;
Reintroducing close company rules for income and corporation tax could raise at least £3 billion of tax a year; and
Abolishing the domicile rule for tax purposes might raise £3.2 billion of tax revenue a year.

I am sure you would have your own list. And you may not agree with the size of guaranteed state pension increase I have suggested. And I fully admit that these are very approximate figures made to illustrate what might be possible. However I hope I have made a reasonable case for what would be required as a guaranteed income for all pensioners if it were a political priority.

Next month, I will be attempting to tackle the question of why it should be a priority or, in other words, what would be gained by increasing the state pension for all?

Why the State Pension needs to be much bigger than the Triple Lock is ever going to get it to

07. November 2023 · Write a comment · Categories: Cartoons, COVID-19, Pensions

An excellent report came out in August this year from Common Wealth entitled Undefined Benefit: Fixing the UK Pensions System on the problems and potential alternatives for the UK pension system. One of the most eye catching points made in the report was that, despite pension gains since 2010 in terms of average pensions, the overall coverage of pensions remains very patchy and uneven, particularly towards the bottom end. This graph in particular caught my eye:

The bottom half have very little total net wealth and virtually no private pension wealth at all. This makes them almost entirely dependant on the State Pension and any other income-related (in the absence of a full pension) or other benefits they may be entitled to.

Coincidentally, the IFS have also produced a paper on pensions recently, including this graph (note the cut off at age 74):

The new State Pension (nSP as the Government refer to it) came into effect in April 2016 and currently stands at £203.85 per week or £10,600 pa. This compares with the Pensions and Lifetime Savings Association’s (PLSA) moderate level of retirement living standards which require £23,300 for a single pensioner and £34,000 for a couple. The moderate level includes such things as:

Some help with maintenance and decorating each year.
£74 a week on food (including food away from the home).
3-year old car replaced every 10 years.
2 weeks in Europe and a long weekend in the UK every year.
Up to £791 for clothing and footwear each year.
£34 for each birthday present.

The plan for closing the gap between these two levels of income has historically relied on occupational pensions in the UK, to a much greater extent than in most countries. However there are problems with this approach. First of all, not everyone has an occupational pension:

This is the current situation with pensions in payment, which is supposed to be being addressed by automatically enrolling employees into workplace pensions. However, the TUC noted as recently as 2020 that, due to the way the rules operated around low-paid and young workers, 6.3 million employees were still without a workplace pension. A survey of 2,000 employees by Unbiased and Opinium, also in 2020, similarly concluded that 17% of over 55s were still without any pension savings.

Secondly, as defined benefit occupational pension membership has fallen, the amounts which will be provided by the defined contribution arrangements which have replaced them are comparatively uncertain. The Pensions Policy Institute’s (PPI) DC Future Book 2023 has looked at the average employee and employer contribution rates under auto-enrolment:

They then projected whether this combined minimum contribution of 8% (on top of the full new State Pension) would be sufficient to meet any of the PLSA’s retirement living standards:

The combination of pension freedoms and not enough in your pot does of course allow crash paths like these, and perhaps explains the slightly more positive pension position shown in the chart from the IFS report compared to the first chart. By cutting off at 74, the IFS could well be surveying people on the steep descents above while they are still depleting their pots to maintain a slightly higher income.

Of course many other models are available – these projections used the PPI economic scenario generator developed by King’s College with many of the economic assumptions taken from the OBR and there are further details at the end of the report – but that seems beside the key point to me here.

Irina Dunn famously daubed the phrase “a woman needs a man like a fish needs a bicycle” on the back of a toilet door in the University of Sydney in 1970. The pension industry has been very successful in attracting funds and innovative in developing products, and occupational pensions coverage overall at some level has clearly increased substantially as a result of auto-enrolment. But none of the bells, gear arrangements, lightweight alloys or any of the other innovations can change the fact that a state-of-the-art defined contribution investment bicycle can never guarantee to float a goldfish to the water level it needs to thrive. You need the state to fill the tank.

This means raising the State Pension, not by some arbitrary formula involving price inflation, earnings inflation and the number you first thought of, but to what we regard as a reasonable level to live on and which we want to be able to guarantee noone falls below. Comparing the UK with other comparable flat rate state pension pillars in Europe we find the following (from March 2022):

This would suggest an increase of somewhere between 40% and 100% to the current State Pension level to reset the balance between a guaranteed income and that based on the lottery of the markets to European levels.

Many people talked about the need to increase societal resilience as we emerged from the pandemic, instead we appear to be moving in the opposite direction, with no clear idea yet about how to deal with NHS waiting lists, even less idea of how to deal with rough sleepers. And on pensioner poverty we have this:

Source: DWP *Households Below Average Income: an analysis of the UK income distribution: FYE 1995 to FYE 2022* *Figure 25 – Percentage of pensioners in relative low income, FYE 2003 to FYE 2022* (ie below 60% of median income)

After a concerted attempt to reduce the percentage of pensioners in relative low income during the pandemic, the curve is upwards again, as it has been since at least 2012.

Things have got so bad that Olivier De Schutter, the UN’s special rapporteur on extreme poverty and human rights, has described the UK’s main welfare system as “a leaking bucket” and said that our poverty levels violate international law.

This cannot go on. We can certainly afford to have a welfare system which does not violate international law. And we can afford a much less leaky bucket when it comes to pensions too. I will provide some ideas on how in my next post.

Actuaries and Hooky Street

03. October 2023 · Write a comment · Categories: Actuarial, Cartoons, Climate Change, Economics, Pensions

The latest publication from the Institute and Faculty of Actuaries (IFoA) is called Beyond the next Parliament: The case for long-term policymaking. It refers to a number of previous reports, such as the Great Risk Transfer report from April 2021 and the two more recent climate papers (here and here), all of which contained much thoughtful analysis even if I did not always agree with all of the recommendations.

The case for long-term policymaking is certainly something that needs to be made loudly and often, although I was perhaps expecting some discussion of concepts like cathedral thinking, ie a capacity to plan and implement projects over multiple generations, or intergenerational justice, an issue of particular importance when discussing responses to climate change, in tying these various reports together within a long-term narrative. The Good Ancestor by Roman Krzanic is a great starting point for considering such questions.

Instead the IFoA have chosen to go in a different direction entirely in linking this previous work together, displaying imprisonment by current short-term political thinking in a paper supposedly focused on the long-term to such an extent that I am now left feeling that I disagree with them about nearly everything.

Take pensions, for instance (bold type is mine):

With the decline of defined benefit (DB) pension schemes, the responsibility for investment and longevity risk is increasingly being placed on the individual.

In a world where responsibility for funding retirement is increasingly being placed on the individual, there is remarkably little consistent consumer information about how much someone should save into their pension, or what a ‘good’ pension pot constitutes.

The IFoA remains concerned that many UK households are not saving enough for later life, are not accessing free guidance or paid-for financial advice, and remain ill-equipped to deal with the risk of running out of money in retirement.

It is almost as if the transfer of risk to individuals is something inevitable, or beyond the ability of mere humans to control. In the words of the late great John Sullivan, in the theme song from Only Fools and Horses:

Cause where it all comes from is a mystery. It’s like the changing of the seasons and the tides of the sea.

Why Only Fools and Horses you ask? Well have you ever heard a better description of defined contribution pensions than:

No income tax, no VAT. No money back, no guarantee

The IFoA’s main concern is that UK households are not doing enough about this new “responsibility” to provide for their own retirement. And the state? The state pension is mentioned only once here:

Naturally, the next UK Government will need to address the adequacy question as part of a wider pensions strategy for the UK that also considers big questions such as the sustainability of the State Pension and the triple lock.

This of course is so-called “positive economics” in action, which makes much of only relying on objective data analysis, but within a policy framework which is not up for discussion. Increased state provision, which one would have thought would at least need to be considered in the mix in this case, is reduced to obsessive focus on tiny questions like the triple lock while being kept generally outside this policy framework. Instead we get this:

We recommend that the government should reinvigorate its public messaging around minimum pension saving levels – particularly through workplace auto-enrolment pension schemes – to ensure that consumers are not lulled into a false sense of security as to whether their pension saving will be adequate to achieve their retirement income goals.
In doing so, government should use expertise and evidence on testing behavioural responses to different messages and channels, to identify those that are most effective in impacting saving behaviour.

So at a time when, according to the Resolution Foundation, the marginal rate for low to middle income households have an effective marginal rate of tax of 63%, the IFoA apparently think it is acceptable to push the cost onto them even more in order to achieve a sufficient pension at retirement. A certain cost and uncertain benefit. It is not a basis for a minimum income guarantee.

The second section sets out the problems associated with long-term care, again asking for a greater contribution by individuals via an expansion of insurance and savings-based financial products.

We are back to the changing of the seasons and the tides of the sea in the next section on keeping pace with rapid digital transformation, which states that:

there has been a trend away from broad risk pools and toward more granular pricing based on an individual’s specific rating factors (i.e. their risk characteristics)

Note the use of the passive tense there – it implies that noone is responsible and there is no way we can swim against this current back up to those old broad risk pools however hard we try. And so we shouldn’t try. The only option is to instead try and lower the premiums at the bottom end a bit – which is explained in their other report, The hidden risks of being poor: the poverty premium in insurance. The model for this is Flood Re, which is explained here. Of course this probably won’t work if you are underinsured as, it seems, 80% of us are.

Section 3 remains one I can cheer about, laying out more clearly than I have seen before to the financial community the risks of climate change, with the work on biodiversity at a somewhat earlier stage. However a framework is immediately assembled in the next section, Going for growth to build a better Britain (a slogan which I am sure Liz Truss would have been quite happy with), to limit the options for tackling these risks. An example:

Even though there is evidence that infrastructure development can promote growth and job creation, governments may be forced to defer such funding until the national balance sheet looks healthier. Although governments may be partially able to finance infrastructure projects, given their capital constraints they also need to attract investment from the private sector.

Unbelievably, the rest of this section then focuses almost entirely on what can be done to lure the private sector into investing in preventing their own doom (not framed in those terms of course, but in terms of boosting growth rather than curbing emissions) along with everybody else’s. As long as private investors are looked after, everything else seems to be a secondary consideration. John Sullivan again:

C’est magnifique, Hooky Street.

Of course I am just having a bit of fun here with the Only Fools and Horses references and I am certainly not suggesting that everyone involved in financial markets is a Del Boy looking to take advantage of every punter or government that comes their way. That would be a caricature as gross as referring to the “dead hand of the state” or talking about public servants as “The Blob”. What I am saying is that the jostle of the market place cannot be the primary solution to many of the problems so accurately analysed here.

I realise I have been very slow to fully appreciate the IFoA’s general direction of travel, but by putting all of these reports together in one place they have clarified this for me. I believe that the overall programme of recommendations here would condemn the poor to further immiseration and uncertainty while letting government largely off the hook for solutions and companies largely off the hook in terms of further regulation. It would further accelerate the financialisation of our economy with the promise of additional financial markets to be exploited by the already wealthy.

This is not acting in the public interest but as a cheerleader for protecting the long-term profits of fund managers. And I despair that, three years on from the IFoA’s Economics Member Interest Group coming into existence, there should still be so little pluralism on display here in economic thinking that this is regarded as a balanced narrative.

It is clear to me that views outside the IFoA’s current policy framework will need to come from elsewhere. I am currently researching a paper on alternative approaches to pensions provision with Alan Swallow which I hope we will be able to publish something about soon.

The Government is using the latest pay increase to actually reduce its funding to the NHS for the second year running

19. July 2023 · Write a comment · Categories: Actuarial, Cartoons, Economics

Pinhead and spikes wait on a bench outside the doctor's room

NHS pay is supposed to be set with reference to the recommendations by the NHS Pay Review Body. The terms of reference of this body, often referred to as “independent”, mean that they are unlikely to make truly unaffordable recommendations, as two of their six considerations in making any recommendations are as follows:

the funds available to the Health Departments as set out in the Government’s Departmental Expenditure Limits; and
the Government’s inflation target.

Despite this, as recently as last month, Helen Whately, the minister of state for social care, was saying that the “government has to look overall at what is affordable”, adding that the PM has said ministers must be “responsible with the public finances…We take the advice and recommendations from the pay review bodies, but you’ll understand that government has to be responsible with the public finances. That’s why I can’t say here and now what the outcome of the whole process is going to be”.

The Government then finally confirmed that it would accept the recommendations of the Pay Review Body (report here), but that:

The government will fund this pay award through prioritisation within existing departmental budgets, with front line services being protected.

Existing budgets in the NHS were set on the basis of a 3.5% pay rise, rather than the 6% for most doctors, 8.1-10.3% for junior doctors and 5% for senior leaders which has been agreed. So it will mean a reduction in non pay budgets to meet the shortfall.

The NHS Confederation’s response is that:

If health leaders are expected to raid their own budgets to somehow plug this funding gap at local levels, it will almost certainly result in cutbacks to patient care elsewhere.

What they didn’t say was that the government will effectively be reducing their net spending on the NHS by not funding the award. As Richard Murphy has pointed out:

Firstly, all of these pay awards will be taxed. They extra pay will be the top part of a person’s pay. It’s likely that tax of 20% and NIC of 12% will be paid by each employee as a result.

On top of that employer’s NIC of 13.8% will be paid. In other words, of the gross cost (pay plus employer’s NIC), just over 40% will return to the Treasury in tax.

It makes no sense, in that case, to refuse that 40% back to the departments that are paying these people.

And that is even before you take into account indirect taxation and multiplier effects.

Not only does it make no sense for the government to use this of all moments to reduce their net contribution to the NHS, it also clearly goes against the wishes of the majority of voters. 82% think more funding is needed and support is found across all age groups, UK nations and across the political spectrum (63% among Conservative voters and 94% of Labour voters).

The main reason given by the government is that it “balances the need to keep inflation in check while giving some staff significant pay increases.” If that “balance” is achieved by robbing Peter of his operation due to a lack of beds or equipment in order to pay Dr Paul, then what sort of an achievement is that? And why, if the government are not prepared to actually fund the pay review body recommendations, do they have a say in whether they are accepted or not?

And this is not the first time. In July 2022, the failure to fully fund the recommended pay increase led, according to the NHS Confederation, to a shortfall of £1.8 billion, adding to the shortfall already due to inflation and increasing energy costs of over £4 billion. Then, as now, these increased costs will need to be absorbed by already over-stretched individual NHS trusts.

This will mean further additional avoidable deaths and more record waiting lists. It is a policy which is anything but balanced.

We have become the nightmare vendor

25. May 2023 · Write a comment · Categories: Cartoons, Climate Change, Demographics, Economics

For those of you who have ever bought or sold a house (and I realise that that is a dwindling proportion as we move down the age ranges), it occurred to me that the UK increasingly resembles the worst kind of vendor. The sort that removes the lightbulbs and the doorknobs before giving up possession.

Harold Macmillan referred to Margaret Thatcher’s Government “selling off the family silver” in response to the widespread privatisations of public assets at the time. This Government has gone further, denying funding to the health and social security safety net we all rely on to such an extent that, as Health Equity in England: The Marmot’s Review 10 Years On found in 2020:

people can expect to spend more of their lives in poor health;
improvements to life expectancy have stalled, and declined for women in the most deprived 10% of areas;
the health gap has grown between wealthy and deprived areas; and
living in a deprived area of the North East is worse for your health than living in a similarly deprived area in London, to the extent that life expectancy is nearly five years less.

However it is even worse than that. I once bought a house from a man who had done all of his own plumbing, despite being a telephone engineer. He proudly took me up to the airing cupboard, where the boiler room displayed piping of complexity which would not have been out of place on a nuclear submarine.

“Everything has its own stop cock.” He said. He might even have called them isolation valves. I just thought of how many different leaks were possible from what he had constructed.

And so it proved. We had a plumber on speed dial before long and, with every new job he undertook for us, most of which was to undo the “work” of which the former owner had been so proud, he used to intone “what a man”, more to himself than to us.

Brexit, even as its architects start to disavow it in the face of the increasingly overwhelming evidence of the bullet holes in our own feet, is our home-made plumbing. And I am sure that there are any number of people around the world, looking at us and intoning “what a man” to themselves. It no longer matters to most of us how much the Brexiteers think they have buffed up their sovereignty isolation valves. Every week brings a new story about another leak of what Macmillan endearingly referred to as our “treasure” that it has enabled.

On immigration, we are like that house on the street which noone from the area wants to go anywhere near. Neighbours only reluctantly enter into any kind of dispute about who should replace the shared fence. There is a huge-sounding dog which barks at you fiercely if you venture up the driveway, on which the only car is on bricks. It feels like, if we were to ultimately die as a nation, noone would notice for years until the smell coming from inside became too much for anyone to ignore any more.

Anyway, enough of all that. I am off to the Hay Festival tomorrow for my annual infusion of ideas, erudition and words just flowing all around me. And so I must leave you with a book recommendation. I will be taking The Golden Mole by Katherine Rundell with me, a brilliant beautifully illustrated book (illustrations by Talya Baldwin) with each chapter focused on a different endangered species. Sounds bleak? No! The writing is so good that you are soon just overwhelmed by the richness you hadn’t even been aware of and might otherwise never have been. I have been reading it very slowly as I really do not want it to end. As Katherine says about The Human at the end of the book, with a different take on treasure:

For what is the finest treasure? Life. It is everything that lives, and the earth upon which they depend: narwhal, spider, pangolin, swift, faulted and shining human. It calls out for more furious, more iron-willed treasuring.

I have this book because Katherine described it so compellingly in an interview at the Hay Winter Festival (a smaller one in November each year). She has also written a book about John Donne, the metaphysical poet, called Super-Infinite. I had not considered until now that I was remotely interested in John Donne, but I also cannot imagine that the week will pass without me buying this and reading it too.

There are three less visible battles to win if we are to decarbonise five times faster than we have done in the last 20 years – and the good news is that actuaries can help!

20. April 2023 · Write a comment · Categories: Actuarial, Cartoons, Climate Change, Economics

In Simon Sharpe’s great new book Five Time Faster, he points out that, if we are going to decarbonise everything, “it’s not just the physical plumbing of the global economy that needs to be replaced, but the intellectual plumbing.” In a blog post from January, Three less visible battles to win, Simon mentions three targets in particular for this intellectual plumbing:

Infrastructure that makes sure heads of government know just how bad climate change could get;
Ideas in economics that exert a critical influence over governments’ policy decisions; and
Institutions in diplomacy that will get the job done.

The first one means targeting the Integrated Assessment Models which have informed so much of our hesitancy and inappropriate prioritisations over the last 20 years where climate is concerned. I have written about this several times before, and this is something actuaries can contribute to much more in the future.

The second is at a much earlier stage, but the opening session in the current IFoA Presidential Speaker Series programme of talks indicates a greater confidence amongst actuaries to talk about, and influence, a more pluralist economic future.

And the third one will I believe become much more tractable once the intellectual tide starts to change.

I will be heading down with my banner to London tomorrow for Extinctions Rebellion’s Big One, alongside 90 other organisations united in demonstrating for a survivable future. Hope to see you there!

The Governor’s Speech

29. March 2023 · Write a comment · Categories: Cartoons, Economics

The Governor of the Bank of England gave a very long speech (with the longest, quite technical, section in the middle about R* apparently aided by ChatGPT) at the LSE a couple of days ago. This had me wondering who he thought he was talking to and therefore, by extension, who he thinks he is representing with his policy choices.

So I drew a cartoon to express my bemusement.

Day 3 of the UCU Strike: fiscal austerity and why this strike is needed

10. February 2023 · Write a comment · Categories: Cartoons, Economics

Day 3 of the UCU strike and we move onto fiscal austerity. This is the type of austerity we normally think of – increasing taxes and reducing government spending – and the most prevalent feature of all the UK governments we have had since 2010, with the cumulative lack of investment in the economy which is the underlying cause of most of the industrial action now taking place all around us. People are not just upset that their pay has not kept pace with inflation for 12 years, it is also the cumulative degradation of the conditions under which they work, seek healthcare, seek education for their children, travel anywhere or don ‘t travel anywhere that has enraged so many.

Rishi Sunak says he would love to give nurses a “massive” pay rise, but insists the money needs to be prioritised in other areas of the health service. Jeremy Hunt insists that his priority is tackling inflation and that public sector pay rises cannot be allowed to jeopardise this. Health secretary Steve Barclay hints that striking NHS staff could be offered a better pay deal from April – if unions accept “productivity and efficiency” reforms in return.

But improving productivity at work requires investment in where you work, as numerous studies have confirmed (one example here). Whereas, as the FT has shown recently, the UK has done the following since 2010:

*Source: FT graphic by John Burn-Murdoch*

And what about Jeremy Hunt’s reasons for keeping pay reducing in real terms in the public sector year after year? That paying an inflation matching increase would in some way “lock in” inflation. As Blair Fix tweeted recently:

Most economists accept that a wage-price spiral is possible, leading to runaway inflation. But why isn’t an interest-price spiral also possible? Interest and wages are just two forms of income. So why is one spiral ‘obvious’ while the other is blasphemy?

It doesn’t make sense until you realize that mainstream economists are in the business of legitimizing capitalist income. Wages can drive inflation (bad workers!) … but capitalist income is always productive.

He has also written about the problems caused by following economic theories treating inflation as a single value, when it is of course an average (or in fact usually at least an average of an average, sometimes switching between arithmetic and geometric averages in the process) taken of a highly volatile underlying data set. It is often said that inflation is redistributive: benefitting borrowers at the expense of lenders. However, one of the insights from Fix’s piece, drawing on Nitzan’s and Bichlar’s work in the 90s, is that big business also benefits from inflation: large corporations and oligopolies are raising prices the fastest at the expense of smaller businesses. Why do we never hear that this is driving inflation?

Because capitalist income is, in their view, “always productive”, you won’t hear about rent-price spirals or profit-price spirals from the current Government. Instead we will hear about how inflation needs to be reduced and this can only be done by further depressing the real value of all of our incomes for another year. This is what the Office for Budget Responsibility (OBR) has to say about CPI:

Following the Russian invasion of Ukraine, we now expect CPI inflation to peak in the fourth quarter of 2022 at its highest rate in around 40 years. The increase is driven primarily by higher gas prices feeding into sharp rises in domestic energy bills, alongside higher fuel prices and global goods inflation. Inflation then falls rapidly, and temporarily goes negative in mid-2024 as energy bills fall back and some global supply pressures reverse.

*Source: Office for Budget Responsibility*

On nominal wage growth and its contribution to Real Household Disposable Income (RHDI) they have this to say:

Nominal wage growth is also high in 2022 and 2023, although not high enough to prevent real wages from falling significantly. The contribution of labour income to annual RHDI growth then settles at an average of 2 percentage points a year over the remainder of the forecast.

Since one of the original motivations for starting this blog was the poor forecasting ability of the OBR, I am not going to set too much store on these forecasts, other than to point out the confidence it has that labour income demands will be thwarted and we will all see our real wages fall significantly over the next year. All in pursuit of a policy for which the expected value appears to be 6 months of deflation.

Deflation would be a disaster, As Frances Coppola has written:

Those who have money are happy because they are becoming wealthier. But someone, somewhere, is going hungry.

As she concludes:

So I’d rather money wasn’t deliberately kept scarce to placate savers. Let the supply of money respond to demand for it. When everyone wants to save in the form of money, you need to produce more of it so those who need to spend money don’t starve. Obviously, we don’t want to create so much money that it becomes worthless. But it is better to risk waking the demon of inflation than to deny people the means to live.

So when the Government says that they need to repress my pay in order to avoid locking in inflation, it reminds me of this paragraph from Catch 22:

Morale was deteriorating and it was all Yossarian’s fault. The country was in peril; he was jeopardizing his traditional rights of freedom and independence by daring to exercise them.

A Government intent on crushing real wage growth or even the hope of it while explicitly targeting deflation within the next two years; an extreme assymetry of power between wage earners on the one hand and lobbying corporations and asset owners on the other. This is why so many of us are exercising our traditional rights today.

Cop out

28. October 2022 · Write a comment · Categories: Cartoons, Climate Change, Economics

The Congress of Berlin: Disraeli as a tooth-drawer, assisted by Queen Victoria, operates on Sultan Abdul Hamid II of the Ottoman Empire, surrounded by political figures from France, Germany etc. Coloured lithograph by J.J. van Brederode after Jan Steen, 1878. (Steen, Jan, 1626-1679 Reference: 778482i)

If you think COP27 is just a virtue-signalling tree-hugging “gathering of people in Egypt” then Rishi Sunak’s decision not to attend it will make a lot of sense as he tries to grapple with his domestic economic agenda ahead of the autumn statement next month. The Treasury has said that the aim of the statement will be to “to put public spending on a sustainable footing, get debt falling and restore stability.” If you remember, the cause of the “instability” was the foreign exchange and gilt markets, and the lack of confidence in the UK’s economic management internationally. One of the causes of the problems with the UK’s economic management was a failure to think internationally.

COP27 is, in reality, an important international economic conference. This conference is going to be focused on, amongst other things, food security, water security and investing in the future of energy. The support with energy bills is, of course, a major element in the debt levels Sunak is worrying about and, as the cost of living crisis worsens (exacerbated by the Monetary Policy Committee’s expected further increase in interest rates on 3 November), food security is going to rapidly move up his agenda in the coming months. The only difference between the most important concerns of the autumn statement and COP27 are therefore timeframes. COP27 is about medium to long-term thinking. Sunak has indicated, by not attending, that he is only concerned with short-term thinking.

Then there is the agenda around providing a just transition to a net-zero world (ie not skewed in favour of the already wealthy countries) and the sustainability of communities made vulnerable by climate change. This is where the conference starts to resemble other famous international conferences of the past which made the reputations of British statesmen. The illustration above is from the Congress of Berlin in 1878, when the then Tory Prime Minister, Benjamin Disraeli, “acquired” Cyprus in a great powers carve up of the globe. In 1944, towards the end of the second world war, John Maynard Keynes famously sparred with Harry Dexter White from the US Treasury at Bretton Woods as the post-war economic consensus was thrashed out at an international economic conference. They matter.

Of course we don’t carve up the globe any more, you may think, but yes we do. As George Monbiot has pointed out in his excellent Regenesis, the ghost acres (ie the the area, outside their own land, that farms need to operate) of UK agriculture can be as much as 2-3 times as many as the acres we farm domestically. A WWF report from 2020 suggested that the UK’s overseas land footprint has increased by 15% on average compared to their 2011-15 analysis. Between 2016 and 2018, an area equivalent to 88% of the total UK land area was required to supply the UK’s demand for just seven agricultural and forest commodities – beef and leather, cocoa, palm oil, pulp and paper, rubber, soy, and timber. Every time we insist on domestic economic growth as a non-negotiable element of our economic policy, we are effectively exercising a land grab in the global south to achieve it. If Sunak was interested in establishing himself as an international statesman, he would be at COP27.

And finally, of course, there is the terrible human rights record of the Egyptian state, which needs to be called out and challenged to avoid COP27 being just a public relations victory for the military regime led by General Abdel Fatah al-Sisi.

But Sunak has turned his back on all of that, so that he can spend a bit more time with the spreadsheets and economic forecasts in his bunker in Downing Street. It suggests a small-minded, short-term thinker, lacking in vision and ambition. Copping out should not be an option for any Prime Minister, even during a crisis.

Democratising the Lathe

21. October 2022 · Write a comment · Categories: Cartoons, Economics, Regulation, Science Fiction

I have been thinking a lot about Ursula K Le Guin’s The Lathe of Heaven over the last few weeks, a book I would highly recommend at any time but particularly at the moment. It is the story of a man, George Orr, who can change reality by dreaming. An ability that terrifies him. He is caught taking unprescribed drugs to try and prevent himself dreaming and as a result is sent for a “voluntary therapeutic treatment” with Dr William Haber, a dream specialist. Haber has built a machine called the Augmentor to make it easier for his patients to have dreams directed by him. He starts to work with Orr, becoming increasingly impatient with Orr’s version of the directions Haber is giving to his dreaming in the machine, until eventually Haber dispenses with Orr and connects himself to the machine instead.

Every time reality is changed it is as if it has always been changed. The changes become increasingly dramatic and disruptive until a peak of general insanity now referred to by all as The Break:

All over the world the various gods were being requested, more or less politely, for an explanation of what had occurred between 6.25 and 7.08 pm Pacific Standard Time.

But what the book really focuses on are George’s desperate attempts to live in this increasingly unhinged reality, as the only person (apart from Haber) aware of the abrupt changes swinging it around, and to hang onto the one person, Heather Lelache (or Andrews in the final version of reality they arrive at), he has ever loved.

One of the sentences on the last page (when he finds out that she has married) has stayed with me in particular:

He stood and endured reality.

However hilarious some of the moments of the last few days have been (and let us not forget some of the highlights here, here and here), we are all going to have to endure some significantly altered reality over the coming years as a result, from the moron risk premium to the cost of living crisis slowly rippling through all aspects of life, at a time when we already have a climate emergency and other planet-wide issues we need to be dealing with. There are many arguments to be had about the best way to tackle all of these problems, and I intend to throw myself fully into those arguments.

However, I would propose that we have to prioritise ensuring that, as a society, we never ever again let the lone mad scientist or economist or politician or former talk show host or indeed anyone else, whoever or however charismatic they are, take over sole control of the machine.

I think we need to do three things to achieve this, before we start to argue over policy:

Adopt proportional representation in parliamentary elections. We have got to broaden the support for whoever is in power, rather than stick with the current system which focuses on a tiny number of people in marginal constituencies and ignores pretty much everyone else. Make Votes Matter have agreed a cross-party document (which I have signed) called the Good Systems Agreement. This sets out the options on voting systems to replace first past the post and the best way of getting there. More about what is wrong with our current system (from the Electoral Reform Society) can be found here. Never again should there be a small cabal of people (like this weekend) deciding on who runs the country – with a steadily shrinking selectorate as their ability to achieve consensus on anything dwindles with every successive decision. We no longer have a system in the UK that can make important decisions and the answer is not more technocracy (leaving it to the so-called clever people, however foolish they may be) or plutocracy (leaving it to the rich), it is more democracy, ie including all of us in the decisions we will have to live with.

Reform media ownership and promote plurality in support of a more democratic and accountable media system. The Media Reform Coalition has produced a manifesto for a people’s media which I support: it includes proposals for an Independent Media Commons – with participatory newsrooms, community radio stations, digital innovators and cultural producers, supported by democratically-controlled public resources to tell the stories of all the UK’s communities. This will allow a much greater range of ideas to be presented to the public and discussed than the current Overton window (see below) and greatly improve our national debate about the things that matter.

Reform election finance. Recommendations for doing this were provided in the July 2021 report by the Committee on Standards in Public Life, with 47 recommendations following a comparison of political and electoral finance regulation in 12 countries (Australia, Canada, Denmark, Finland, France, Germany, Ireland, the Netherlands, New Zealand, Norway, Sweden, and the USA), the majority of which are around reforms to campaign practices, meeting emerging threats around the source of donations, delivering greater transparency and enhancing compliance with election finance law.

We have big problems to solve in the UK and we need everyone to be able to contribute if we are going to solve them. However currently:

Our votes are counted in a way which effectively wastes most of them;
The information we receive about politics is fed to us through a very partial sieve controlled by a small unrepresentative group of people whose vested interests effectively define our Overton Window; and
Influence and access to power often appear to go to the highest bidder rather than the best ideas.

All of this needs to change whoever is Prime Minister in the coming weeks, months and years.

We Know Zero